Flash Co-Creator Jonathan Gay talks of the challenges they faced in using H.264 standard.
The second challenge was selecting a video codec. We wanted to use the cool new H.264 open standard but Macromedia did not feel they could afford the H.264 license fee. I believe that the capped $5M per year H.264 license fee was similar in scale to the annual Flash engineering budget at the time. The H.264 license fee model is very anticompetitive. H.264 licensing is free for very small users, expensive for medium size companies and inexpensive for very large companies. This model puts the midsize companies who could challenge the dominant companies at a significant competitive disadvantage and is the reason that we implemented the proprietary but affordable On2 codec in Flash instead of the open and expensive H.264 codec. The capped license fee also discourages large companies from building a competitor to H.264 because they can simply pay the capped license fee and know they are managing their patent risk and suppressing their smaller competitors. For example, it would have cost Macromedia $5M per year to add H.264 to Flash but it probably cost Adobe much less to add H.264 because they were probably already paying a substantial fee for their video editing products. You can probably thank the success of Flash video for the fact that streaming H.264 video over the Internet is free for another 5 years. Solving this patent license problem is probably why Google purchased On2. However, if they open source the latest On2 codec as people suspect they want to, it’s much easier to launch a patent lawsuit against them because anyone can inspect the source code. Given the large number of patents in the video space, it may not actually be possible to build an open source codec that does not inadvertently infringe on someone’s patent. The MPEG Licensing Authority solves the problem in a Borg-like way by adding any new patent challengers to their patent pool.